U.K. 10-year bond yields dropped to the lowest level in a week after a government report showed industrial production slumped in September, spurring demand for the safety of government debt.
Benchmark gilts outperformed German bunds before Bank of England policy makers start a two-day meeting tomorrow where they will decide whether to increase monetary stimulus, or so-called quantitative easing. The pound weakened against 12 of its 16 major counterparts as the factory data damped optimism the economy is recovering. The Debt Management Office sold 3.25 billion pounds ($5.2 billion) of 10-year gilts.
“Gilts have performed better than bunds and a portion of that move can be attributed to the softer U.K. data,” said Jason Simpson, an interest-rate strategist at Banco Santander SA in London. “This doesn’t change the bigger picture in that we don’t expect more QE on Thursday.”
The 10-year gilt yield was little changed at 1.82 percent at 4:40 p.m. London time after declining to 1.80 percent, the lowest since Oct. 29. The price of the 1.75 percent bond maturing in September 2022 was at 99.41.
The German 10-year bund yield increased one basis point to 1.43 percent.
Benchmark U.K. 10-year yields are likely to climb to 2 percent by Dec. 31 and reach 2.90 percent by the end of 2013, Banco Santander’s Simpson said.
British industrial production dropped 1.7 percent from August when it slipped 0.5 percent, the Office for National Statistics said in London. Separate data showed U.K. retail sales fell and house prices slid in October.
The Bank of England’s nine-member Monetary Policy Committee will leave the target for asset purchases at 375 billion pounds on Nov. 8, according to 35 of 45 economists in a Bloomberg News survey. Six forecast a 50 billion-pound increase, and four predict a 25 billion-pound expansion.
The Debt Management Office sold gilts maturing in September 2022 at an average yield of 1.815 percent, up from 1.764 percent at the previous auction on Oct. 2. Investors bid for 1.93 times the amount of securities allotted, versus 1.87 times last month.
Gilts have returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.6 percent and U.S. Treasuries rose 2.1 percent.
The pound erased gains versus the euro following the industrial production data.
“The pickup in momentum in the economy during the third quarter appears to have stalled into the fourth and that makes it a closer call for the Bank of England this week,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “BOE policy has not been the main driver of pound direction, which is being influenced more by developments in the euro area.”
The pound dropped 0.1 percent to 80.15 pence per euro after appreciating to 79.84 pence, the strongest level since Oct. 2. Britain’s currency was little changed at $1.5994.
Sterling will strengthen to 76.50 per euro in the next 12 months, Bank of Tokyo-Mitsubishi’s Hardman said.
The pound has gained 1.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 3.1 percent, while the dollar dropped 1.9 percent.